Connext's chain bridging protocol has Announced a new token standard to reduce losses from bridge hacks. According to a July 24 announcement, the new โxERC-20โ standard allows token issuers to maintain a list of official bridges and control how many tokens each can mint.
In addition to Connext, decentralized finance (DeFi) platform Alchemix Finance will implement xERC-20 tokens, according to the announcement.
Connext Alchemix
Today, Connext announces support for the xERC20 standard and onboarding projects to bring its tokens securely to every chain.
As our main user, we have been working with @AlchemixFi bring $toUSD, $alETHand $ ALCX to @arbitrum and @optimismFND. https://t.co/S2tBLpuuqe
โ Arjun | arch xERC20 (@arjunbhuptani) July 24, 2023
The new token standard was originally presented on July 7 as Ethereum Improvement Proposal (EIP) 7281. It was co-authored by Connext founder Arjun Bhuptani. At the time, Bhuptani said that he would help minimize losses from bridge hacks by acting on the principle that โtoken issuers are the ones who get hit when bridges are hacked.โ
Instead of each bridge issuing its own version of a token on each network, the new standard would allow bridges to mint "official" or "canonical" versions of each token. However, they can only do this with the permission of the token issuer, and this permission would be enforced via smart contracts. Token issuers could also limit the number of coins a particular bridge could mint, according to the proposal.
Under EIP-7281, bridges could still mint their own versions of tokens, but such derivative coins would not be considered "canonical" versions. As a result, consumers would end up rejecting unofficial versions of the coins. In Bhuptani's view, this would lead to a more secure DeFi space because it would put the responsibility of preventing bridge hacks squarely on the shoulders of each token issuer, helping to prevent end-users from suffering losses.
To become an official part of the Ethereum ecosystem, an EIP must be approved by the EIP publishers, a process that can take months. The July 24 announcement said the standard will now be rolled out to Connext and Alchemix before official approval, allowing end users to immediately trust it.
Related: The multi-chain bridge hack was a "big blow" to the Fantom ecosystem, says Cronje
In the announcement, Connext stated that the standard token will be "backwards compatible" with the official version should it eventually be approved by EIP publishers. Bhuptani argued that the new implementation will prevent bridges with poor security or excessive centralization from being taken seriously, stating:
"This approach [...] encourages open competition and innovation as token issuers now have the flexibility [to] granularly update your preferences for supported bridges over time. Instead of prioritizing building a monopoly over liquidity, or trying to grab market share by blocking token issuers (or in some cases entire chains), bridges are now forced to have continued focus on their security and quality of service, lest they get delisted.โ
The topic of bridge security has become a hot topic in the crypto community. These concerns were amplified on July 7, when more than $100 million was mysteriously removed of the multichain bridging protocol. At first, the Multichain team only referred to the withdrawals as "abnormal", but later clarified that an unknown individual had accessed the CEO's cloud storage system to withdraw funds without users consent.
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